Published January 17, 2009

Wanted: A Budget that 'holds the fort'

A government-funded lender for SMEs and restructuring home loans will help

By VIKRAM KHANNA
ASSOCIATE EDITOR

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THE upcoming Singapore Budget due to be unveiled on Jan 22 - earlier than normal, but not a moment too soon - will be the most important, at least since the Asian crisis of 1997/98. It will be important because this time around, the stakes - for the economy, for companies and for workers - are particularly high. The 2009 Budget will help determine how well the Singapore economy and the workforce will weather the devastating recession that is upon us.

HOUSING RELIEF We need a Budget that protects people. For the mass of the people, reliefs on housing-related payments would be most helpful in augmenting household cash flows

As the Q408 numbers confirmed, the economy is now contracting. With exports declining, many large projects postponed or cancelled and layoffs already underway, the economy is likely to continue sliding for most of this year.

The government's growth forecast for 2009 is minus 2 to one per cent - and could yet be cut. OCBC, HSBC, Citigroup and BNP Paribas forecast minus 2.8 per cent. Deutsche Bank projects a 4.5 per cent decline. We could be staring in the face of one of the worst recessions in Singapore's history, if not the worst.

If ever there was a time for a bold, radical Budget, this is it. What we need is a Budget for the here and now, which will be fast acting, with lots of firepower directed at three essential tasks: preserving jobs, creating jobs and protecting people.

Let's start with preserving jobs. About 60 per cent of Singapore's workforce is employed by small and medium sized enterprises (SMEs), of which there are some 160,000. If these firms run into serious trouble, mass bankruptcies and layoffs could result. Keeping as many of Singapore's SMEs afloat as possible, even if they are not doing well, should be the top priority in this Budget.

The key is to help these companies where they are most vulnerable, and that is in the area of financing. SMEs are highly dependent on banks. But banks have slashed their lending just when companies need it most. Even commercially sound companies who have never defaulted on a loan have had their credit lines pulled, because their bankers are worried about 'counterparty risk' - the fear that even if the companies themselves are creditworthy, their business counterparties might not be.

Such behaviour might be rational from the point of view of individual banks, but the collective consequences can be devastating - eventually also for the banks themselves. Deprived of working capital and trade finance, even well run, profitable companies can go under.

In the face of this problem, the government announced, last November, a package of $2.3 billion of loans to companies through risk sharing schemes administered by Spring Singapore. The government increased its share of loan insurance premiums from 50 per cent to 80 per cent (and later, to 90 per cent). Its risk share of loans made under the local enterprise financing scheme (for loans up to $15 million) and the microloan programme (for loans up to $100,000) were also raised to 80 per cent.

However, anecdotal evidence suggests that these measures have not, so far, had their intended effects. By mid-December, banks had only approved 30 applications out of 140 for the schemes, implying a rejection rate of almost 80 per cent. They had lent out a mere $5 million in total. The vast majority of SMEs have been shut out by the banks, despite the generous government guarantees.

At a Spring seminar last month, a banker from a major local bank was asked whether his bank would relax its tightened credit standards given that the government's guarantees had been raised, and his answer was that repayment ability was still the most important consideration. In other words, more a 'no' than a 'yes'.

It remains to be seen whether the raising of the government's risk share of loan insurance premium from 80 per cent to 90 per cent will make a difference. Many would not be surprised if it did not. And if it does not, SMEs could start accelerating layoffs as the year goes on.

Given the banks' current extraordinary aversion to risk, relying on them to support struggling SMEs at this time, even with generous risk-sharing by government, is itself too risky; we are at a point where lending is too critical for the economy's health to be left to bankers.

What are the alternatives? One is to increase the government's risk sharing to 100 per cent for a temporary period, but with some government oversight on lending so that lending standards do not swing to the other extreme. Another is to establish a government agency that guarantees all kinds of credits, which works via other financial institutions. However, there would still be a question mark over whether those credits would be extended to companies in the first place.

A third alternative is to establish a new, government-funded lending institution that can lend with more confidence (and less paperwork) than banks currently do - and against a wider variety of collateral, including equity.

Singapore needs at least one of these three alternatives in the Budget. Or else another mechanism which ensures that funds continue to flow to SMEs during this crisis, and which is fool-proof. Otherwise, a mass of jobs could be needlessly lost. Measures to improve companies' cashflows - like extended loss carry-back provisions against taxable income of previous years - would also help.

On creating jobs, Singapore's options in a year like this are limited. Unlike larger economies, it cannot rely much on traditional fiscal stimulus measures. Out of every dollar the government spends, more than half leaks out in the form of imports. Nevertheless, it is worth capturing, and maximising, the positive impact of whatever remains at home. With total construction demand expected to fall by 36 per cent, one option would be bring forward as many public sector projects as possible.

The Building and Construction Authority announced that it will award a record $19 billion worth of projects this year, including several smaller projects ($50 million or less) which would help smaller local firms. This is a step in the right direction.

Jobs can also be created in the services sectors (where there are fewer 'import leakages') by expanding employment in health, education and other government services that add to the productivity of the economy; some ministries have already announced more hiring, but there is scope for more to do so.

An expansion of training and job-matching schemes, would also help reduce 'frictional unemployment' - that is, the number of people in between jobs, which, too, is likely to rise.

Finally, we need a Budget that protects people. For the mass of people, reliefs on housing-related payments would be most helpful in augmenting household cash flows. Effective measures here would include a restructuring of housing loans, through a shift to interest-only mortgages by the HDB (and by more private banks), allowing tax deductions on mortgage payments and cuts in property-related taxes. These changes would also help arrest the sharp decline in property prices, which discourage refinancing, erode household wealth and make banks even more loan-shy.

Measures to help vulnerable groups are also needed. Despite the best efforts, there will unavoidably be people who will be laid off or have their pay severely cut.

But the key is design. Whatever help is provided should put a floor under consumption, but without compromising incentives to work. The most direct and effective measure would be a means-tested cash transfer programme that is temporary (up to six months after retrenchment, and to be terminated when a worker finds a new job). This can be institutionalised so it that can serve as an automatic stabiliser for the economy.

CPF top-ups would not be appropriate, as they do not address immediate consumption needs - unless there is a mechanism to allow individuals to access part of their CPF balances as a 'loan' to be 'repaid' upon finding employment. The latter measure would minimise budgetary costs.

Tax rebates for individuals would be welcomed, although they would benefit a relatively small group (since most people pay no income tax) and would more likely be saved than spent. Such rebates would be more a nice-to-have than a must-have.

The 'must-haves' for this Budget are fast-acting measures, a focus on keeping companies alive, improving household cash-flows, protecting the vulnerable and creating jobs. If the Budget can thus 'hold the fort' for one year, it will have done its job.